Thursday, August 20, 2009

Ruling in Tax-Auditing Case Puts Corporations on Edge

According to the Wall Street Journal, a recent tax federal appeals court ruling is causing stress for corporate lawyers across the country. The decision gives the IRS authority to look through documents that have been complied by independent businesses. However, legal experts assert this is a violation of the “word-product doctrine” which shields an individual or business from having to turn over documents created "in anticipation" of litigation.” Check out the WJS story below.

Last week, in a widely anticipated ruling, a federal appeals court in Boston said the IRS could gain access to documents created by a defense-contracting firm to determine whether the company's calculation of its tax liabilities would pass muster during a possible IRS audit. The decision in U.S. v. Textron Inc. reversed a January ruling by a smaller panel of judges on the same court.

To some lawyers who represent corporations, the decision signaled an attack by the courts on the "work-product doctrine," the legal rule that shields an individual or business from having to turn over documents created "in anticipation" of litigation. In its ruling, the First Circuit Court of Appeals said the documents at Textron weren't protected under the doctrine because they weren't prepared specifically "for use" in litigation.

The ruling "eviscerates the work-product doctrine," says Frederick Krebs, president of the Association of Corporate Counsel, an organization for in-house corporate lawyers. He says the ruling, which is binding in federal courts in the Northeast where the First Circuit is based but could influence other courts, will embolden the IRS -- as well as plaintiffs' lawyers who bring shareholder lawsuits -- to seek more such documents from public companies. "If the IRS gets access, [it] can immediately figure out where the client thinks it's weak, what it's willing to pay," he says. The IRS praised the ruling in a statement last week but declined further comment.